RBI ‘switch plan’: Govt may buy back short-term bonds

By: | Published: January 20, 2015 2:32 AM

Reserve Bank of India is planning to release a six-month calendar of ‘switch’ programme wherein the government will buy back...

Reserve Bank of India is planning to release a six-month calendar of ‘switch’ programme wherein the government will buy back short-term bonds and issue long-term securities in return to investors, said G Padmanabhan, the executive director at the central bank.

“We are planning to carry forward operations to smoothen the liability profile of the government through an active switch or buyback programme and release a switch calendar along with the indicative half year calendar for issuance of bonds,” Padmanabhan had said on Saturday, a copy of which was released on the RBI website on Monday.

Faced with large redemptions in the medium term due to big borrowings, RBI bought back Rs 500-crore worth of short-term bonds in 2014 from a large insurance company.

There are two ways to conduct a switch, one through direct buyback from the investors of the specific bond or through a more democratic reverse auction system that invites bids from various investors.

Padmanabhan said that the gross market borrowing of the government is likely to be higher in 2015-16 because of big redemptions scheduled even though the government has promised to be frugal in expenditure and stick to the fiscal consolidation path.

“The demand for bonds would be impacted by the likely pickup in the private sector credit, scaling down of SLR and HTM, the policy stance on foreign portfolio investment in G-sec, among other factors,” he added.

He noted that due to the fiscal stimulus given in the aftermath of the 2008 global financial crisis, the market borrowing of the government had jumped 400% during 2008-10. On increasing the investment limit in the government bonds for foreign investors, Padmanabhan said that RBI will have to balance such decision keeping in mind financial stability. He warned that “investment tourists” that pour dollars into Indian financial markets could pull out immediately in adverse situations.

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